Not Just for Stocks
Technical analysis can be used on any security with historical trading data. Thisincludes stocks, futures and commodities, fixed-income securities, forex, etc. In thistutorial, we'll usually analyze stocks in our examples, but keep in mind that theseconcepts can be applied to any type of security. In fact, technical analysis is morefrequently associated with commodities and forex, where the participants arepredominantly traders.Now that you understand the philosophy behind technical analysis, we'll get intoexplaining how it really works. One of the best ways to understand what technicalanalysis is (and is not) is to compare it to fundamental analysis. We'll do this in the nextsection.
Technical Analysis: Fundamental Vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of thought in thefinancial markets. As mentioned, technical analysis looks at the price movement of asecurity and uses this data to predict its future price movements. Fundamental analysis,on the other hand, looks at economic factors, known as fundamentals. Let's get into thedetails of how these two approaches differ, the criticisms against technical analysis andhow technical and fundamental analysis can be used together to analyze securities.
Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, whilea fundamental analyst starts with the financial statements By looking at the balancesheet, cash flow statement and income statement, a fundamental analyst tries todetermine a company's value. In financial terms, an analyst attempts to measure acompany's intrinsic value. In this approach, investment decisions are fairly easy to make- if the price of a stock trades below its intrinsic value, it's a good investment. Althoughthis is an oversimplification (fundamental analysis goes beyond just the financialstatements) for the purposes of this tutorial, this simple tenet holds true.